Please ensure Javascript is enabled for purposes of website accessibility

Following a Dismal 2015, What's Next for Micron Technology Inc. Investors?

By Chris Kuiper, CFA - Jan 5, 2016 at 12:07PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Following a rough year where the stock has fallen by more than half, we look at whether it is best to weather the storm or cut losses now in this chipmaker.

Shareholders of Micron Technology (MU -3.74%) are no stranger to volatility. The stock rode a massive rally for two years only to plummet nearly 60% in 2015. After releasing disappointing earnings last month, investors who have held on for this long are wondering if the worst is over or yet to come. Let's examine both sides of this story.

The case for sticking with it
Micron is a cyclical stock, and the ups and downs of such an investment may not be worth the stress for a lot of shareholders. But for those who hang on, they can offer strong, longer-term gains. Micron rallied over 400% in 2013 and 2014. The decline in 2015 was nothing to sneeze at, but the stock has still more than doubled from 2012 levels.

The most compelling case for holding on to shares of Micron is that if history is any guide, there may not be much downside left. During the previous cyclical downturn in 2012, Micron shares similarly fell over 55% from their highs.

Going forward, investors have high hopes for the Inotera acquisition, which is expected to close in the middle of 2016. This deal should be immediately accretive to gross margins, EBITDA, earnings per share, and free cash flow. Big picture, potential positives for the memory industry include the increased DRAM content in the iPhone 6S and other smartphones, and Samsung (NASDAQOTH: SSNLF) is expected to cut capital spending by 20% for DRAM products next year.

There are also two potential wildcards. The first is Micron's partnership with Intel on 3D NAND and its XPoint product, which could help boost margins. Rumors suggest that Micron could even become a buyout target. Don't make an investment decision on speculation of a buyout, but do keep such rumors in in mind as one factor that may keep the stock price from sliding further.

The case for cutting bait
The pessimistic view on Micron might say that the memory industry has not changed, and the down cycle just getting started. Although the industry has consolidated, it will still take months or longer for a full cycle to elapse as excess supply is reduced.

The mobile division, which has been a source of growth at Micron, is similarly looking bleak with smartphone growth decelerating. While the Inotera acquisition could be a positive catalyst, it also introduces some additional business risks, including regulatory approval and the need to raise an additional $2.5 billion in debt. Micron shares fell 3.7% on the day the Inotera deal was announced, revealing some investor doubts surrounding the purchase.

Micron is also struggling against its rivals. While competitors Samsung and SK Hynix are rumored to be working on ramping up 18-nanometer manufacturing, Micron is still stuck at the older 20-nanometer process. Samsung is also believed to be ahead of Micron in terms of 3D NAND flash memory, according to analysts.

What kind of an investor are you?
Cyclical stocks require patience and a strong stomach as longer-term investing horizons help smooth out the volatility of the business. However, timing can also be critical. Case in point, Micron shares have a 10-year loss of about 8%, a five-year gain of nearly 50%, and a one-year loss of 55%. Combine this with the fact that no dividend is paid, and investors need a lot of incentive to hold onto their shares.

The decision to buy or sell largely comes down to what kind of investor you are, your style, and your risk appetite. I believe capital is scarce, and there are many opportunities out there that offer better prospects than hoping Micron can weather another cycle of sustained losses like it experienced in 2012.

Chris Kuiper has no position in any stocks mentioned. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
$59.15 (-3.74%) $-2.30
Intel Corporation Stock Quote
Intel Corporation
$34.52 (-2.43%) $0.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/10/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.